Why I Invested 30% Of My Capital In O’Reilly Automotive (NASDAQ:ORLY)

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I first really helpful buying O’Reilly Automotive (NASDAQ:ORLY) in late 2014. Since then, the inventory has tripled and thus it has outperformed the S&P 500 by a large margin (+200% vs. +112%). Nonetheless, O’Reilly nonetheless has the potential to supply excellent returns due to its strong development technique, its exemplary administration, and its cheap valuation. In consequence, I just lately invested 30% of my capital within the inventory.

Enterprise overview

Since its IPO in 1993, O’Reilly has provided life-changing returns to its shareholders. To make certain, throughout this era, the inventory has rallied greater than 200-fold, from about $2.50 to $535 now. Even when one seems to be solely on the final decade, the inventory has rallied 797% and therefore it has overwhelmed the S&P 500 by a powerful margin, because the latter has rallied 215% over this time-frame.

The excellent efficiency of the inventory of O’Reilly has mirrored its distinctive outcomes. Over the past decade, O’Reilly has grown its revenues and its earnings each single yr. It has grown its revenues and its earnings per share at a mean annual price of 8.3% and 24.5%, respectively, all through this era. This development price mixed with the distinctive consistency are testaments to the sturdy enterprise mannequin of the corporate and its exemplary administration.

The principle cause for this extraordinary efficiency is the excessive fragmentation of the automotive aftermarket business, which leaves ample room for consolidation. To make certain, the market share of the highest 10 auto half chains has elevated from 44% in 2009 to 54% in 2018. As the highest auto chains broaden, they obtain nice economies of scale and therefore the small native shops can not compete with them on worth. This ultimately drives them out of enterprise and leaves extra market share obtainable to the highest gamers. As the highest 10 auto half retailers have a complete market share of solely 54%, there’s ample room for additional consolidation and therefore O’Reilly nonetheless possesses nice development potential.

Final yr, the coronavirus disaster triggered a fierce recession, which triggered a collapse within the earnings of most corporations. O’Reilly was a brilliant exception, because it truly benefited from the pandemic. The 13.2% lower within the complete U.S. miles pushed, which was brought on by the social distancing measures, resulted in a steep improve within the demand for automobile repairs. Given additionally the sturdy tailwind from the unprecedented fiscal stimulus packages, O’ Reilly grew its revenues 15% and its earnings per share 32%, from $17.88 to an all-time excessive of $23.53. In different phrases, O’Reilly loved a blowout yr whereas different corporations had been struggling to deal with the pandemic.

Furthermore, O’Reilly has maintained its sturdy enterprise efficiency thus far this yr. Within the first quarter, it grew its comparable gross sales 25% and its earnings per share 78%, from $3.97 to $7.06. It thus exceeded the analysts’ consensus by a powerful $1.75.

An awesome portion of the spectacular earnings within the first quarter ought to be attributed to some lockdowns, which resulted in larger wants for automobile repairs, and the brand new fiscal stimulus bundle, which vastly enhanced the disposable revenue of quite a few shoppers. Traders ought to at all times do not forget that O’Reilly is a shopper discretionary inventory and therefore it vastly advantages when shoppers are flush with money.

Progress prospects

Because the tailwinds from the pandemic and the stimulus packages are non-recurring, O’Reilly will quickly face arduous comparisons over the previous couple of quarters. In different phrases, its enterprise situations are more likely to return to regular. This helps clarify the warning of analysts, who anticipate the corporate to develop its earnings per share “solely” 8% per yr in 2021 and 2022. It additionally helps clarify the latest 6% correction of the inventory.

Nonetheless, traders shouldn’t miss the massive image for this anticipated short-term deceleration. As talked about above, O’Reilly has sturdy development potential due to the excessive fragmentation of its addressable market. Administration intends to open roughly 160 new shops yearly. This determine corresponds to three% annual development of areas.

Furthermore, the variety of complete miles pushed within the U.S. impacts the demand for restore and upkeep merchandise. The variety of complete miles pushed within the U.S. elevated 0.4% and 0.9% in 2018 and 2019, respectively. The whole miles pushed additionally elevated 2.1% till the onset of the pandemic, in February-2020. They then plunged 13.2% because of the pandemic however they may return to their long-term development trajectory as quickly because the pandemic subsides. Due to this fact, O’Reilly is more likely to develop, not solely its retailer depend by 3% per yr but in addition its same-store gross sales due to the tailwind from the rising complete U.S. miles.

Lastly, O’Reilly has one other main development driver, particularly its aggressive share repurchases. Over the past 9 years, the corporate has decreased its share depend by 46%. Administration just lately raised the buyback quantity to $1.5 billion, which is enough to scale back the share depend by 4% on the present inventory worth.

Extra importantly, the administration of O’Reilly has proved exemplary within the execution of the share repurchase program. Throughout bear markets and recessions, most corporations droop their buybacks as a way to protect money and endure the downturn. They really feel extra comfy repurchasing their shares throughout growth durations when inventory costs are excessive. This technique hardly enhances shareholder worth.

O’Reilly is a brilliant exception to this rule. It takes full benefit of market sell-offs and bear markets and repurchases its shares at full throttle. In 2020, the corporate decreased its share depend by 5% at opportune inventory costs, thus vastly enhancing shareholder worth. For the reason that inception of its buyback program, in 2011, O’Reilly has repurchased 82.5 million shares at a mean worth of $181. As this worth is roughly one-third of the present inventory worth, it’s evident that the buyback program of O’Reilly has vastly enhanced shareholder worth.

Total, traders can moderately anticipate not less than 10% common annual development of earnings per share from O’Reilly thanks to three% annual development of the shop depend, 1%-2% same-store gross sales development, and a 5% annual discount within the variety of shares. This development price is way decrease than the 10-year common development price of 24.5% of the corporate however it’s prudent to be conservative, as a way to have a large margin of security.


O’Reilly is at present buying and selling at a ahead price-to-earnings ratio of 21.0. That is a lot decrease than the price-to-earnings ratio of 44.7 of the S&P 500. Due to this fact, the valuation of O’Reilly is engaging, significantly given the distinctive development file of the corporate, its promising development prospects, and the wealthy valuation of the broad market.

Last ideas

O’Reilly is a “boring” inventory for traders with a short-term investing horizon however it’s an distinctive inventory for many who can maintain the inventory for the long run. The auto elements retailer has an distinctive development file, nice development potential, and an exemplary administration. As well as, within the unlikely occasion of one other spherical of lockdowns (e.g. as a result of a big mutation of the virus), O’Reilly will probably be a secure haven for traders, because it has proved an awesome beneficiary from lockdowns.

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